EU nations split over transaction tax after U.K. files challenge

U.K. has begun legal action...

European Union efforts to create a hard-to-escape financial transaction tax are coming under fire from within the bloc for overstepping the plan’s 11-nation scope.

Luxembourg’s Finance Minister Luc Frieden said he “cannot exclude” a challenge to the EU’s proposal because of its impact on his nation and other non-participants. Last week, the U.K., home to the EU’s largest financial center, went a step further and began legal action at the European Court of Justice to guard against future economic damage.

The proposed levy could be collected worldwide as soon as the start of next year by France, Germany and nine other EU nations that have so far signed up, if the effort stays on schedule. To stop traders from escaping the levy by operating outside the tax’s zone, the EU plan invokes “residence” and “issuance” ties to firms in participating nations.

“I’m not sure whether this project of an FTT in Europe will go ahead,” Frieden said at an April 20 panel at International Monetary Fund meetings in Washington, referring to the proposed tax by its initials. “The world can only grow if we have cross-border activities.”

Luxembourg’s renewed skepticism about the transaction tax follows its decision to begin the automatic exchange of tax data in 2015, easing its bank-secrecy rules to coordinate with the U.S. and 25 EU nations. The U.S. also opposes the EU’s transaction-tax proposal while signing off on an April 19 Group of 20 nations call that “more needs to be done” to fight tax evasion worldwide.

‘Patchwork’ Levies

The EU is trying to remedy what it sees as a “patchwork” of local levies and rein in speculative trading. The transaction-tax plan would charge a 0.1 percent rate for stock and bond trades and 0.01 percent for derivatives transactions, with some exemptions for primary-market sales.

Italy, one of the nations that has signed on to the effort, also has expressed reservations about the plan’s impact on secondary-market sovereign bond trading. “Transactions on government bonds must be excluded,” Italian ambassador Ferdinando Nelli Feroci told reporters in Brussels on April 19. This is a “red line” for Italy and not up for negotiation, Feroci said.

The euro zone is facing two consecutive years of economic contraction as it grapples with a sovereign debt crisis that so far has forced five of its 17 members to seek bailouts. Transaction-tax opponents say the levy would raise sovereign borrowing costs and hamper recovery, while proponents say it would hold the financial sector more accountable for the costs of crisis cleanup.

France’s Efforts

“We won’t stop our work and we won’t slow it down,” French Finance Minister Pierre Moscovici told reporters April 20 in Washington, when asked about the U.K. challenge. The German Finance Ministry said in an e-mailed statement it was “confident” the U.K. challenge wouldn’t succeed.

The EU estimates the tax could raise 30 billion euros ($39 billion) to 35 billion euros a year. To become law, it has to be approved by the participating nations. The 11 countries that support the plan are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia. All 27 EU nations can sit in on the talks and have the option to join.

Dutch Finance Minister Jeroen Dijsselbloem said the Netherlands could still sign on to the transaction-tax effort if the proposal is changed to lessen its effect on pension funds. He also said he was “sympathetic” to the U.K.’s protest of the tax’s effect on non-participants.

Dutch Conditions

“The Dutch would still like to join that group” of nations seeking agreement within so-called enhanced cooperation, he told reporters at an April 20 press conference in Washington. “Our conditions have not been met.”

The current transaction-tax plan is based on a prior proposal that failed to win agreement among all 27 EU nations. When the interested countries won approval to proceed under so- called enhanced cooperation procedures, the U.K., Luxembourg, Malta and the Czech Republic abstained because of concerns about how the tax might work.

“We remain confident that this decision was legally sound,” said Emer Traynor, a spokeswoman for EU Tax Commissioner Algirdas Semeta, in an e-mail yesterday.